United States Ex Rel. Shupe v. Cisco Systems, Inc.

Case: 13-40807 Document: 00512688074 Page: 1 Date Filed: 07/07/2014

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

United States Court of Appeals

Fifth Circuit

FILED

No. 13-40807 July 7, 2014

Lyle W. Cayce

UNITED STATES OF AMERICA, ex rel. RENE SHUPE Clerk

Plaintiff - Appellee

v.

CISCO SYSTEMS, INCORPORATED; AVNET, INCORPORATED;

CALENCE, L.L.C., also known as Insight Enterprises, Incorporated,

Defendants - Appellants

Appeal from the United States District Court

for the Southern District of Texas

Before SMITH, CLEMENT, and HIGGINSON, Circuit Judges.

PER CURIAM:

Defendant telecommunication companies file an interlocutory appeal of

the denial of a motion to dismiss for failure to state a claim under the False

Claims Act, 31 U.S.C. § 3729. For the following reasons, we REVERSE the

judgment of the district court and REMAND for further proceedings.

FACTS AND PROCEEDINGS

Relator Rene Shupe brought a qui tam action on behalf of the United

States alleging that defendant telecommunication companies violated the

False Claims Act (“FCA”), 31 U.S.C. § 3729, while bidding for and being

awarded contracts to install and operate communications networks for school

districts and libraries throughout South Texas. Partial funding for the

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installation and operation of these networks came through the Education Rate

(“E-Rate”) Program, administered by the Universal Service Administrative

Company (“USAC”) with funds from the Universal Service Fund (“USF”).

The USAC and the USF were byproducts of the 1996

Telecommunications Act and the Federal Communications Commission

(“FCC”) rulemaking that followed. 47 U.S.C. § 254; 47 C.F.R. §§ 54.701, 54.702.

USAC is an independent, not-for-profit corporation designated by the FCC as

the administrator of the USF. USAC collects mandatory contributions from

telecommunications carriers and distributes some of these funds through the

E-Rate Program, which funds telecommunications services, internet access,

internal connections, and basic network maintenance in the form of price

discounts for eligible services. 47 C.F.R. § 54.504.

To obtain E-Rate funds an applicant must develop a technology plan

outlining its technology needs and submit it for approval to the state, the

USAC, or an independent entity approved by the FCC or certified by the USAC

as qualified to provide approval. 47 C.F.R. § 54.508. The applicant then files

a request for proposals with the USAC to begin a bidding process that is

required to be fair and open to competition. 47 C.F.R. § 54.503. After receiving

bids and selecting a service provider, the applicant submits a form to the USAC

certifying it has complied with the requirements of the program and requesting

discounts for the services. 47 C.F.R. § 54.504.

Shupe, who worked as a project manager for a telecommunications

installer, alleges that the defendants tampered with the competitive bidding

process, engaged in the “gold-plating” of equipment provided, and substituted

E-Rate ineligible products for eligible ones in violation of the FCA by

presenting materially false or fraudulent claims for payment or approval by

the United States, by using or causing to be used false records or statements

regarding equipment to be installed, and by conspiring with each other to

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defraud the United States. The government investigated Shupe’s claims and

declined to intervene in the suit.

Defendants filed a motion to dismiss for failure to state a claim under

Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Civil Procedure

9(b)’s heightened pleading standard for fraud claims. The relevant arguments

for this appeal were that the FCA causes of action must be dismissed because

the USAC is not a government body or funded with government dollars, and

the alleged actions taken by defendants do not constitute false claims under

the FCA. 1

The district court denied the motion on May 13, 2013. It rejected the

idea that the “funds must be deposited into the Treasury and/or distributed by

a government body for there to be a claim under the FCA . . . . The only

requirement is that the government provide or reimburse a portion of the

money or property that is requested.” Because the USAC funds are collected

under a mandate from the government and distributed in accordance with FCC

regulations, the district court found that the government provided the money.

The district court pointed to the “broad definition” of a claim in the FCA and

the legislative history of the act to support a “broad application.” The district

court found the USAC a “grantee, recipient, and agent” of the government.

The defendants asked the court to certify for interlocutory appeal the

threshold issue of whether FCA liability extends to requests submitted to the

USAC for reimbursement from the USF. The defendants argued that the

district court’s order created a conflict with Lyttle v. A T & T Corp., No. 2:10-

1Defendants also argued that Shupe’s claims should be dismissed because they were based

on publicly disclosed information; that Shupe did not plead his fraud claim with sufficient

particularity under Rule 9(b); that Shupe failed to allege his claims against defendants Cisco

and Calence with sufficient particularity; and that any causes of action against Calence

alleged to have arisen before July 14, 2005, must be dismissed because the company did not

exist at that date.

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1376, 2012 WL 6738149 (W.D. Pa. Dec. 28, 2012) (adopting report and

recommendation). The district court granted the defendants leave to apply for

an interlocutory appeal on June 11, 2013.

STANDARD OF REVIEW

We review de novo a district court’s ruling on a Rule 12(b)(6)

motion. United States ex rel. Willard v. Humana Health Plan of

Tex. Inc., 336 F.3d 375, 379 (5th Cir. 2003). We accept all well-

pleaded factual allegations as true, and we interpret the complaint

in the light most favorable to the plaintiff. Id. The plaintiff’s

factual allegations must support a claim to relief that is plausible

on its face and rises above mere speculation. United States ex rel.

Marcy v. Rowan Cos., 520 F.3d 384, 388 (5th Cir. 2008). In

addition, claims brought under the FCA must comply with the

particularity requirements of Rule 9(b). United States ex rel.

Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903

(5th Cir. 1997). Rule 9(b) requires, at a minimum, “that a plaintiff

set forth the ‘who, what, when, where, and how’ of the alleged

fraud.” Id.; see also United States ex rel. Rafizadeh v. Cont'l

Common, Inc., 553 F.3d 869, 872–73 (5th Cir. 2008).

United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 266 (5th

Cir. 2010).

DISCUSSION

This case decides when the Government “provides any portion of”

requested money, as to trigger the protection of the False Claims Act, a statute

that shadows every aspect of the administrative state. 31 U.S.C. § 3729(c)

(2008). The FCA’s pre-amendment definition of a “claim” requires that the

claimant request money that “[t]he United States Government provides any

portion of” or “will reimburse . . . any portion of.” 31 U.S.C. § 3729(c) (2008).

Our opinion involves an outdated version of the False Claims Act, 2 but the key

2 The FCA was amended in 2009. The district court analyzed these claims under the

prior version of the FCA because the amendments were not made retroactive to conduct

before the date of enactment, May 20, 2009. The prior version of the statute stated that

Any person who--

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term “provides” is reproduced in the now amended statute, which defines a

“claim” as, among other things:

[A]ny request or demand . . . for money or property and whether

or not the United States has title to the money or property, that

. . . is made to a contractor, grantee, or other recipient, if the money

or property is to be spent or used on the Government’s behalf or to

advance a Government program or interest, and if the United

States Government . . . provides or has provided any portion of the

money or property requested or demanded.

31 U.S.C. § 3729(b)(2)(A)(ii)(I) (2012) (emphasis added). Accordingly, the

rule extracted from our opinion will influence the reach of the False Claims Act

current and past. We decide that the Government “provides any portion” of

the money requested under § 3729(c) when United States Treasury dollars flow

to the defrauded entity or if the false claim is submitted to a Government

entity.

“The FCA generally permits the Government or a party suing on the

Government’s behalf to recover for false claims made by the defendants to

secure payment by the Government.” United States ex rel. Doe v. Dow Chem.

Co., 343 F.3d 325, 329 (5th Cir. 2003). We have explained that to state a claim

under the FCA in our circuit, “a plaintiff must allege: (1) a false statement or

(1) knowingly presents, or causes to be presented, to an officer or

employee of the United States Government or a member of the Armed Forces

of the United States a false or fraudulent claim for payment or approval;

(2) knowingly makes, uses, or causes to be made or used, a false record

or statement to get a false or fraudulent claim paid or approved by the

Government;

(3) conspires to defraud the Government by getting a false or fraudulent

claim allowed or paid . . .

is liable to the United States Government for a civil penalty of not less than

$5,000 and not more than $10,000, plus 3 times the amount of damages which

the Government sustains because of the act of that person . . .

31 U.S.C. § 3729(a) (1994).

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fraudulent course of conduct; (2) made or carried out with the requisite

scienter; (3) that was material; and (4) that is presented to the Government.”

Steury, 625 F.3d at 267.

The Government’s position is that “provides” means “to make available,”

and that the Government makes money available when it “direct[s] the

collection and disbursement of . . . funds.” Gov’t Br. 2. This broad view of the

statutory term is unsupported by the cases interpreting the FCA. To be sure,

courts have found that the Government “provides any portion” of the money

requested when the Government has given even a drop of treasury money to

the defrauded entity. See, e.g., United States ex rel. DRC, Inc. v. Custer Battles,

LLC, 562 F.3d 295, 303–04 (4th Cir. 2009)

(“Textually, therefore, a claim made to a grantee of U.S. money is not defined

by the amount of money that the U.S. government paid directly to the claimant.

So long as ‘any portion’ of the claim is or will be funded by U.S. money given to

the grantee, the full claim satisfies the definition of claim.”); United States ex

rel. Shank v. Lewis Enters., Inc., No. 04-CV-4105–JPG, 2006 WL 1207005, at

*7 (S.D. Ill May, 3, 2006) (holding that Abandoned Mine Reclamation Fund

(“AMRF”) was covered by FCA because “defendants do not even argue that all

the money in the AMRF is private, they just say that money from the coal

mines is the ‘primary source[ ]’ of funding. Implicitly, then, defendants admit

some portion of the funds come from the government.”).

Courts have also identified entities that do not receive Government

funds, but nevertheless are covered by the FCA because of their status as

Government entities. See e.g., United States v. McNinch, 356 U.S. 595, 598

(1958) (holding that the Federal Housing Administration is covered by the FCA

because “[t]he FHA is an unincorporated agency in the Executive Department

created by the President pursuant to congressional authorization. Its head,

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the Federal Housing Commissioner, is appointed by the President with the

Senate’s consent, and the powers of the agency are vested in him. The agency

is responsible for the administration of a number of federal housing programs

and operates with funds originally appropriated by Congress. In short, the

FHA is about as much a part of the Government as any agency can be.”); United

States v. Mackby, 261 F.3d 821, 824, 826 (9th Cir. 2009) (noting that it is

undisputed that a claim for Medicare payment triggers the FCA); United States

v. Hicks, No. 04-4189-GPM, 2008 WL 1990436, at *3 (S.D. Ill. May 5, 2008)

(holding that false claims may be made against United States Postal Service

and noting that “[a]lthough the Postal Service is a ‘self-funding’ entity, this is

not to say that it is divorced from the United States Treasury. The Postal

Service is self-funding only in the sense that Congress has appropriated to it

all of the Postal Service’s own revenues. It nevertheless is ‘operated as a basic

and fundamental service provided to the people by the Government of the

United States.’” (quoting Baker v. Runyon, 114 F.3d 668, 672 (7th Cir. 1997)).

Importantly, however, courts have identified programs that do not

trigger FCA protection because they do not receive federal funds and they have

too tenuous of a relationship to the Government to be considered a Government

entity. See, e.g., United States ex rel. Sanders v. Am.-Amicable Life Insur. Co.

of Tex., 545 F.3d 256, 259 (3d Cir. 2008); United States ex rel. Totten, 380 F.3d

488, 493 (D.C. Cir. 2004) (holding that claim against Amtrak not presented to

the Government and noting that “[t]he word ‘provides’ in Section 3729(c), when

appropriately limited to the present tense, squares neatly with a presentment

requirement. False Claims Act liability will attach if the Government provides

the funds to the grantee upon presentment of a claim to the Government.”);

Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 184 (3d Cir. 2001)

(holding that submission of fraudulent legal bills for approval to the United

States Bankruptcy Court does not violate the False Claims Act because “the

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submission of false claims to the United States government for approval which

do not or would not cause financial loss to the government are not within the

purview of the False Claims Act”); Costner v. URS Consultants, Inc., 153 F.3d

667, 677 (8th Cir. 1998) (holding that United States involvement in

negotiations that led to the stipulation under which a private entity agreed to

put money into a fund for environmental clean-up costs did not trigger the FCA

because “[n]one of the money in the private Vertac trust fund, long since

depleted, was provided by the United States Government. No federal funds

were ever intermingled with that fund. The United States had no access to the

trust fund, nor did it have any control over its disbursement, which was

overseen by the State of Arkansas. Moreover, no money disbursed from the

private fund was ever reimbursed by the federal government”); see also Garg

v. Covanta Holding Corp., 478 F. App’x 736, 741 (3d Cir. 2012) (“At best, Garg’s

complaint established that UCUA had to pay money out of its general

operating funds that it should not have had to pay. The fact that some

unknown portion of those general operating funds might be tangentially

attributable to a tax break from the federal government is irrelevant. . . . With

or without Covanta’s alleged fraud, the treasury of the United States would be

in the same position. In sum, the federal government does not lose out from

Covanta’s supposed fraud.”); United States ex rel. Fellhoelter v. Valley Milk

Products, L.L.C., 617 F. Supp. 2d 723, 731 (E.D. Tenn. 2008) (“The alleged

‘claims’ in this case do not reach or threaten to reach government funds. The

money Valley Milk has allegedly received by paying less than the blend price

came from the Settlement Fund, money provided solely by milk producers. . . .

The court concludes that these alleged frauds are not claims against the

government fisc as required by the FCA.”).

This last set of cases reveals that courts have limited the FCA’s

application to “instances of fraud that might result in financial loss to the

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Government.” Sanders, 545 F.3d at 259 (internal quotations omitted); see also

Costner, 153 F.3d at 677 (“Essentially, then, only those actions by the claimant

which have the purpose and effect of causing the United States to pay out

money it is not obligated to pay, or those actions which intentionally deprive

the United States of money it is lawfully due, are properly considered ‘claims’

within the meaning of the FCA.”). The money in the USF is untraceable to the

United States Treasury. Accordingly, although the United States may have a

regulatory interest in the E-Rate program, the United States does not have a

financial stake in its fraudulent losses. That recovery for an unquantifiable

regulatory interest falls outside of the scope of FCA protection is further

supported by the FCA’s damages provision, which provides a penalty of “3

times the amount of damages which the Government sustains.” 31 U.S.C.

§ 3729(a) (2008) (emphasis added).

Acknowledging this, the Government urges that the FCA applies

because of the extent of the FCC’s control over the E-Rate program. This

control-based test fails to distinguish Hutchins, in which the Third Circuit

addressed “fraudulent legal bills for approval to the United States Bankruptcy

Court” and rejected the argument that “even if no claim were made against

United States Treasury money in connection with the law firm’s inflated legal

bills, the submission of these bills for approval by the Bankruptcy Court

violates the False Claims Act.” 253 F.3d at 180, 183. That the bankruptcy

court could approve a portion or all of these claims did not matter because “the

Act is only intended to cover instances of fraud ‘that might result in financial

loss to the Government.’” Id. at 183 (quoting United States v. Neifert-White

Co., 390 U.S. 228, 232 (1968)). Moreover, the Government’s involvement in

creating the privately capitalized clean-up fund in Costner was insufficient to

sustain a claim under the FCA because “[a]ny allegedly false claims for

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payment made by defendants to the Vertac trust fund had no nexus to the

United States.” 153 F.3d at 677.

Courts differentiate between entities that are the Government and those

that are not by looking at their statutes rather than the extent of Government

supervision. In Totten, for example, then-Judge Roberts distinguished

Rainwater v. United States, 356 U.S. 590 (1958), which held that the

Commodity Credit Corporation was part of the Government for FCA purposes.

Totten explained, “the statute in that case expressly provided that the

Corporation was “an ‘agency and instrumentality of the United States.’”

Totten, 380 F.3d at 492. Next, then-Judge Roberts distinguished Amtrak’s

statute: “Amtrak’s statute, of course, gives Amtrak the exact opposite status:

Attempts to analogize the other facts in Rainwater—that all of the Commodity

Credit Corporation’s employees were employees of the U.S. Department of

Agriculture, and that the entire budget of the Corporation came from the

federal treasury—are similarly fruitless.” Totten, 380 F.3d at 492 (internal

citations omitted).

The Postal Service’s statute similarly explains: “The United States

Postal Service shall be operated as a basic and fundamental service provided

to the people by the Government of the United States, authorized by the

Constitution, created by Act of Congress, and supported by the people.” 39

U.S.C. § 101(a) (emphasis added). And the Supreme Court recognized that

“The FHA is an unincorporated agency in the Executive Department created by

the President pursuant to congressional authorization. . . . The agency is

responsible for the administration of a number of federal housing programs

and operates with funds originally appropriated by Congress.” McNinch, 356

U.S. at 598 (emphasis added).

Illustratively, in another FCA case the Government did “not challenge

the defendants’ contention that the FCA, prior to the 2009 amendments, has

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no application to Fannie Mae or Freddie Mac.” Brief for United States at 2 n.2,

United States ex rel. Adams v. Wells Fargo Bank Nat’l Ass’n, No. 2:11–cv–

00535–RCJ–PAL, 2013 WL 6506732 (D. Nev. Dec. 11, 2013). Fannie Mae’s

enacting statute, for example, explains:

The purposes of this title include the partition of the Federal

National Mortgage Association as heretofore existing into two

separate and distinct corporations. . . . One of such corporations,

to be known as Federal National Mortgage Association, will be a

Government-sponsored private corporation, will retain the assets

and liabilities of the previously existing corporation accounted for

under section 1719 of this title, and will continue to operate the

secondary market operations authorized by such section 1719.

12 U.S.C. § 1716b. The same statute explains that the other corporation, by

contrast, will “be known as Government National Mortgage Association, [and]

will remain in the Government.” Id. (emphasis added).

Although we have recognized in other contexts that “the Congressional

Budget Office has treated universal service fund contributions as federal

revenues,” Tex. Office of Pub. Util. Counsel v. F.C.C., 183 F.3d 393, 427 (5th

Cir. 1999), courts have explained that the program is independent from the

Government:

While we recognize that the FCC does hold substantial power over the

fund indirectly, essentially by overseeing USAC, we also recognize that

it has no ability to control the USF through direct seizure or

discretionary spending. We hold that USAC, which, as administrator of

the USF, has discretion over if, when, and how it disburses universal

service funds to beneficiaries, holds dominion over the USF.

In re Incomnet, 463 F.3d 1064, 1071 (9th Cir. 2006). Moreover, “[w]hen the

FCC created NECA [USAC’s sole shareholder and therefore the program’s

administrator], it made clear that NECA acted exclusively as an agent for its

members and had no authority to perform any adjudicatory or governmental

functions.” Farmers Telephone Co., Inc. v. FCC, 184 F.3d 1241, 1250 (10th Cir.

1999).

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At least one lower court that has closely considered the question for a

similar fund has rejected the same arguments that Shupe and the United

States now advance. Lyttle v. A T & T Corp., No. 2:10-1367, 2012 WL 6738242,

*15-21 (W.D. Pa. Nov. 14, 2012). 3 A relator there brought a false claims case

against a telephone company on allegations that the company fraudulently

certified compliance with FCC regulations while seeking reimbursement from

a fund created to subsidize a service to help deaf or speech-impaired persons

communicate via phone. Id. at *1-10. The fund for the services was established

through congressional and FCC action and initially administered by the same

National Exchange Carrier Association, Inc., that oversees the E-Rate fund.

The United States argued that

1) the Administrator is an agent of the United States for purposes

of reimbursing money from the Fund (even if not for other

purposes); [and] 2) the money is “provided by” the United States

because it is collected based on Congressional levy and because it

is a line item in the federal budget . . . .

Id. at *13. The defendants responded that “1) the Administrator is not an

‘agent’ of the FCC because it had no authority to bind the FCC by its actions;

[and] 2) the contractor provision does not apply because the United States does

not ‘provide’ the funds . . . .” Id. at *14.

The magistrate judge rejected the argument that the United States

“provides” any portion of the money in the funds. Id. at *18-21. Any

submission of false claims did not “cause financial loss to the government.” Id.

at *20. Nor could the Government cite “a case in which a court has held that,

although money was put into a fund and taken out of it by private parties, the

Government nevertheless ‘provided’ the funds because it required that such

3 The Magistrate Judge analyzed the claims under the amended version of the FCA,

which arguably broadens the basis for claim liability from the version we consider today.

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money be paid or because the program is included in the federal budget.” Id.

at *21. The district court adopted the magistrate judge’s recommendation as

its opinion. Lyttle, 2012 WL 6738149, at *1.

Like the court concluded in Lyttle, we conclude that the Government did

not provide the funds to the USF to subject claims to it to FCA liability. The

text of the relevant version of § 3729(a) speaks of making false claims to “the

United States Government,” seeking to get false claims paid “by the

Government,” or conspiring “to defraud the Government.” The Supreme Court

has been clear that § 3729(c)’s definition of claim does not expand FCA liability

over acts directed towards parties that are not “the Government.” Allison

Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 669-70 (2008).

Although USAC came about through the actions of Congress and the FCC, and

the FCC retains some oversight and regulation, it is explicitly a private

corporation owned by an industry trade group. The defendants point out that

Congress “explicitly rejected the FCC’s request” to directly administer the E-

Rate program. While the United States now argues that a decision that USAC

and the USF are not susceptible to FCA liability would lead to the FCC

administering the program directly and therefore be “contrary to efficient

administration,” decisions about the costs and benefits of government versus

private administration are for Congress to make, not this court. The money in

the USF is provided by private telecommunication providers because of a

mandatory contribution scheme established by the FCC and Congress.

Congress has not declared this a tax, and the origination of the bill in the

Senate undermines the argument that it is one. The executive has admitted

that including the USF in budget documents is for the purpose of being

“comprehensive,” not a claim that these are clearly federal funds. The district

court in Lyttle rejected the identical arguments raised here because the

government could not defend its position that there was any “economic loss to

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the United States Treasury,” the original purpose of the statute. 2012 WL

6738242, at *21. The logic of the Supreme Court’s unanimous opinion in

Allison Engine rejects a broad reading of the FCA (because of its language or

any reliance on its legislative history) and supports the approach taken in

Totten. 553 U.S. at 667-68. If Congress had wanted the FCA to apply to the

USAC and the USF, it could have made it clear in § 3729 or administered these

funds through a governmental entity.

Accordingly, that the FCC maintains regulatory supervision over the E-

Rate program does not affect the Congress’ decision, embodied in the program’s

independent structure, to externalize the cost of administering the program to

a private entity. 47 C.F.R. § 54.701(a). Because there are no federal funds

involved in the program, and USAC is not itself a government entity, we agree

that the Government does not “provide[] any portion of” the requested money

under the FCA. § 3729(c) (2008).

CONCLUSION

For the foregoing reasons, we REVERSE the judgment of the district

court and REMAND for further proceedings.

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